What Is FOB? Free on Board Shipping Term
FOB (Free on Board) is an Incoterms 2020 trade term that defines the point at which the seller’s responsibility ends and the buyer’s begins. Under FOB, the seller delivers the goods on board the vessel at the named port of shipment. Risk and cost transfer to the buyer once the goods are loaded on the ship.
FOB applies exclusively to sea and inland waterway transport. For multimodal transport (truck + rail + sea), the equivalent term is FCA (Free Carrier).
FOB Cost and Risk Allocation
| Responsibility | Seller | Buyer |
|---|---|---|
| Manufacturing and packaging | Yes | No |
| Export customs clearance | Yes | No |
| Transport to origin port | Yes | No |
| Origin port handling/loading | Yes | No |
| Risk transfer point | On board vessel | On board vessel |
| Sea freight | No | Yes |
| Marine insurance | No | Yes |
| Destination port unloading | No | Yes |
| Import customs clearance | No | Yes |
| Transport to project site | No | Yes |
FOB in Piping Material Procurement
FOB is the most widely used Incoterm for bulk piping material shipments. A typical purchase order for seamless pipes from a Chinese or Indian mill reads: “FOB Shanghai” or “FOB Mumbai.” This means:
- The mill is responsible for manufacturing, packing, inland transport, and loading the pipes on the vessel at the named port.
- The buyer arranges and pays for sea freight, insurance, destination handling, and customs clearance.
| Example Price Breakdown | Amount (USD/ton) |
|---|---|
| Mill price (EXW) | $1,800 |
| Inland transport to port | $50 |
| Port handling + loading | $30 |
| FOB price | $1,880 |
| Sea freight (buyer pays) | $120 |
| Insurance (buyer pays) | $15 |
| Destination handling (buyer pays) | $45 |
| Total landed cost | $2,060 |
FOB Origin vs FOB Destination
These terms are used in US domestic commerce (UCC) and differ from the ICC Incoterms definition:
| Term | Risk Transfers | Freight Paid By |
|---|---|---|
| FOB Origin (Shipping Point) | At seller’s loading dock | Buyer |
| FOB Destination | At buyer’s receiving dock | Seller |
| FOB [Port] per Incoterms | On board vessel at named port | Buyer (freight) |
Why Buyers Choose FOB
FOB gives the buyer control over the freight leg. Large EPC contractors and trading companies negotiate volume freight rates with shipping lines, often achieving better rates than the seller could. FOB also lets the buyer choose the insurance coverage level and preferred carrier.
The trade-off: the buyer assumes risk earlier (at the origin port) and must manage logistics from that point. For buyers without freight expertise or those shipping to remote locations, CIF or DAP may be more practical.
Key Documents Under FOB
The seller must provide specific shipping documents at the FOB point:
| Document | Purpose |
|---|---|
| Bill of lading | Proof of shipment and title document |
| Commercial invoice | Price, quantity, Incoterms |
| Packing list | Weights, dimensions, bundle details |
| Mill test certificates | Material compliance per ASTM/API/EN 10204 |
| Certificate of origin | Country of manufacture (for customs) |
| Insurance certificate | Only if buyer requests seller to arrange |
For procurement documents and the RFQ-to-PO process in EPC projects, FOB pricing serves as the basis for bid comparison when buyers manage their own freight.
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